Financial Planning magazine reported that its “perceived risk-tolerance level” barometer had dropped 7 points from January to 27.9 in February the lowest level since its inception. This barometer seeks to measure clients’ (or self-directed investors’) appetite for risk. In looking at the readings over the last 12 months, it’s very easy to understand why emotions are the biggest enemy of successful investing. Let’s look at how well emotional reactions were able to time the market.  

Two months out of the last 12 have had extremely low levels: September 2015 (28.9) and February 2016. What do these two months have in common? They were immediately after a month that had a sharp downward correction in stock prices. In other words, after a bad month, investors tend to want to sell out and/or change what they’re doing. The problem is that investors without a plan or those who give up on their plan are perpetually late. Care to guess what was the best month of 2015? October, up about 8.3% a month emotional investors missed out on.

Investor emotions haven’t timed the market so well in 2016, either. As of March 18, the S&P 500 is up about 12% from its February lows, or 6% in the first 13 trading days of March.  Basically, after the market corrects, people have less faith in the market.

So investors tend to feel pessimistic at the wrong time but is their optimism more profitable? Unfortunately, the answer is “no.” For example, the reading was over 52 in December 2015, the 2nd highest reading in the last 12 months. That means people felt relatively good but they were also wrong in their timing since both January and February had periods of sizeable pullbacks in stock prices.

What should you learn from this?

  1. Emotions are almost always wrong; they are the enemy of discipline. You’re probably hungry to chase more returns (and add risk) when you shouldn’t be, yet are looking for a place to hide when you should be coming out of hibernation.
  2. Emotions cause you to hunt for information that will support a decision you already want to make or interpret information you have in a manner that would support your emotional position. This gives you the illusion that your decision was based on logic when in reality it was deeply rooted in emotion. Psychologists call his “confirmation bias,” and if you are a frequent reader, you know I mention this a lot. Why? Because it’s that important.
  3. An investment plan should contain an understanding and acceptance of how the portfolio is likely to react in certain market conditions. In other words, the conversation about whether or not you’re taking the appropriate amount of risk should ideally be had when your confidence is high.  
  4. Understand that the news media does not work for you or for me ever. Seriously. Stop buying the emotion they are constantly selling.

If you aren’t sure your plan is set up to give you a chance to make meaningful progress toward your goals this year, or if you don’t have a plan at all, please give me a call to review your current investments and goals.

about the author: Joshua I. Wilson CMT

Josh-Wilson CMTJoshua I. Wilson, CMT®, AIF® is a partner and wealth manager who has managed over $2B for TD Ameritrade. Joshua led the national training and development program for all of TDA’s new advisors and managers, won a national coaching award. Joshua gave his graduation speech at Brown University. Joshua is a Chartered Market Technician® (CMT®) and a Accredited Investment Fiduciary® (AIF®).

Learn more and/or Contact Joshua

Continue Reading

Other articles filed under Fort Worth CFP Team Posts

Joshua Wilson is a Featured Speaker at Global Private Wealth Forum

June 12, 2017 - WorthPointe Chief Investment Officer Joshua I. Wilson, CMT®, AIF® has been named a featured speaker at the Global Private Wealth Dallas Forum. Global Private Wealth Dallas Forum 2017 is a gathering for Ultra High Net Worth Investors and Family Offices...
Continue Reading

What’s the Deal with Trump’s Tax Plan?

May 17, 2017 - The questions about Trump’s tax plan are already coming in. Here’s a quick rundown of what you need to know. It’s not actually a plan at all — more like a very big picture wish list. It’s a couple of...
Continue Reading

Robo Advisors vs Financial Planners

April 26, 2017 - [embed]https://www.youtube.com/embed/a6dMJKmaQvo[/embed] When is a robo advisor sufficient to manage your investments? Is an algorithm ever a good substitute for the personal touch of a human manager? WorthPointe Partner and Chief Investment Officer, Joshua WilsonCMT®, AIF® weighs in on when to...
Continue Reading

Joshua to Speak at Alts Investor Forum South

March 22, 2017 - Joshua Wilson, Chief Investment Officer at WorthPointe, will be speaking at the Alts Investor Forum South in Dallas on April 4. He will participate on a panel with other top CIOs from the region, discussing current market trends and investment...
Continue Reading

Joshua Speaks at the Private Wealth Texas Forum

February 14, 2017 - Joshua Wilson, Chief Investment Officer at WorthPointe, will be speaking at the Private Wealth Texas Forum in Dallas on February 27, 2017. This one-day meeting of the largest family offices, private banks and registered investment advisors based in Texas provides...
Continue Reading

Return to Blog Home